What Inflation Data Means for the Economy After SVB Collapse

Inflation stood at 6 percent for the 12 months ending February, cooling down from 6.4 percent in January, as shown by the latest U.S. Consumer Price Index (CPI) figures released by the U.S. Bureau of Labor Statistics (BLS) on Tuesday. The data widely follow experts' expectations, reporting a slowing of inflation for the eighth month in a row.

This month, CPI figures are likely to be closely scrutinized by investors, as the banking industry navigates the aftermath of the historic collapse of Silicon Valley Bank (SVB)—the biggest since the financial crisis of 2008. The February inflation report is bound to influence any decisions the Federal Reserve will make about hiking interest rates further in the coming future.

The Fed's decision to hike interest rates last year in an attempt to bring down rising inflation was a key contributing factor to SVB's failure, which had invested billions in long-dated U.S. bonds such as mortgage-backed securities. As interest rates surged, the value of the bank's bonds plunged—causing SVB's bond portfolio to significantly lose value.

As struggling tech companies drew on their deposits with the bank, a short-on-cash SVB was forced to sell its bonds for liquidity. Once the bank announced a gap in its portfolio left by the sale of the loss-making bonds, investors and customers panicked, leading to a bank run on SVB.

Fears that runs on the banks could spread to other institutions might lead the Fed to adjust its decision on rising interest rates, despite Chair Jerome Powell recently announcing that interest rates could be "higher than previously anticipated."

Olu Sonola, head of U.S. regional economics at The Fitch Group, told Newsweek: "The Fed's resolve to bring inflation down to target is now facing its first acid test. Financial stability concerns are now front and center, but the labor market is still too hot, consumer demand remains fairly strong, and as today's print confirms, inflation is still too high."

He added: "The Fed will likely respond by reaffirming their commitment to price stability while acknowledging increased financial stability risks. The outcome of next week's Fed meeting is going to depend on what unfolds over the coming days, but a 25bps [basis points] hike still seems likely."

The Fed's next policy announcement is scheduled for next week on March 22, with the central bank now widely expected to raise interest rates by 0.25 percent.

According to data from the CME Group, as of Tuesday, there's a 71.6 percent chance that the Fed will raise interest rates, while there's a 28.4 percent possibility that the central bank will leave interest rates unchanged. The numbers have slightly changed from Monday, when the company estimated an 80 percent chance of the Fed rising interest rates.

This change in expectations follows the meltdown of California tech lender SVB, whose collapse has threatened to destabilize the entire banking sector, with many raising concerns of contagion to other banks, despite the Biden administration's attempts to calm down the markets and reassure investors.

Different banks have different expectations of what the Fed will do. Goldman Sachs has predicted that the Fed won't raise rates, while Bank of America, EY, and Oxford Economics are reportedly expecting the central bank to raise interest rates by 0.25 percent.

Update, 3/14/23 9:45 a.m. ET: This article has been updated to add a comment by The Fitch's Olu Sonola.